June 4, 2008

Out to Sea

Wall
Street floats on an ocean of dumb money. Patent purveyor Ocean Tomo has
patent-oriented stock indices,
supposedly taking the heavy lifting out of picking patent-heavy stocks.
Speculators, who may be hedge fund or large bank proprietary traders, or market
research fabricators, collar patent lawyers for quick steps up on a steep
learning curve.

IP Law 360:

The sheer complexity and multidisciplinary nature of patent matters
presents a unique set of issues and challenges for patent lawyers who choose
to serve this role. For example, market participants' baseline understanding
of patent matters is typically substantially below that of other commercial
or regulatory areas, and many aspects of patent law are counterintuitive.

Deep pocket patent rubes commonly appreciate that patents may be invalidated,
but most assume that's a rare event, like a real estate deed being invalidated.
After all, patents are approved by the USPTO. Strict standards must apply. That
over 30% of patents are killed in court consistently surprises. KSR might as
well be FDR's grandson.

While litigation occurs over many months, acquisitions and capital market
transactions transpire in a matter of weeks. Due diligence of an IP portfolio in
that context is a hand-waving exercise. Ultimately, in these situations, the
goal is binary decision (buy or not), not work product analysis that is home
base to backbench patent litigators.

Traders are a jittery bunch. The RIM Blackberry case is an example of market
IQ. After RIM lost at district court and the CAFC denied appeal, RIM did a
doomed Hail Mary in requesting an en banc rehearing, something that almost never
occurs. The Street is reputedly known for "factoring in" predicted outcomes.
Although en banc RIM's request was a laugher, RIM stock dropped 8% during the
two days after the CAFC told RIM to take a walk. (The NASDAQ, the exchange RIM
is listed on, dropped 1.5% in that period.)

And there is an oil-and-water mix of mentalities at work. Lawyers, who
generally treat predictive statistics like a rash, are ill-suited to the
odds-jockeys that traders are. But patents smell like money, so dumb money keeps
sniffing.

"...patent value divided by book value where patent value is assessed by Ocean Tomo’s PatentRatings® system."

Posted by: Anon E. Mouse at June 4, 2008 3:18 AM

Benjamin Graham used to say: "In the short run, the markets are like a voting machine. In the long run, a weighing machine."

So long as it has been put together using a model of IP value that is not focussed exclusively on number of patents (like some other public company valuation models I've seen in the past), I would expect the Ocean Tomo index on average to outperform the market indexes over a long period of time.

Every economist knows that human capital is what fuels growth, even if they can't model it.